New York Lenders Subpoenaed Over Seller-Financed Mortgage Alternatives

Financial regulators in New York are scrutinizing a revival in seller-financed deals for marketing inexpensive homes to lower-income people who cannot get a mortgage.

The New York State Department of Financial Services on Friday subpoenaed four investment firms that either are involved with seller-financed deals or provide financing for such deals, said a person with direct knowledge of the matter but spoke on the condition of anonymity because the investigation is preliminary.

The firms receiving subpoenas from New York regulators are Battery Point Financial, New York Mortgage Trust, Apollo Residential Mortgage and an affiliated entity of Apollo Global Management, the person said. All four are in Manhattan.

The nation’s top consumer regulator, the Consumer Financial Protection Bureau, recently began an informal inquiry into seller-financing arrangements, which are commonly referred to as contracts for deeds. The bureau has assigned two enforcement lawyers to research the seller-financing market and determine whether the terms of some deals violate federal truth-in-lending laws.

Contracts for deeds and other forms of seller financing have been in resurgence after the financial crisis, which created a large supply of cheap foreclosed homes for investors to buy and left many potential homeowners unable to qualify for a mortgage. The high-interest, long-term contracts have proliferated because banks have retreated from lending to low-income families. Private investment firms have stepped in to fill the void.

Proponents contend that a contract for deed can provide an alternative route for lower-income borrowers to buy a home. But the market has a long history of abuse, and contracts often favor the seller.

Under a contract for deed, the title to a home does not pass officially to the buyer until the final payment is made. Homes are often sold “as is” and in need of repairs.

The person with direct knowledge of the matter said the subpoenas from New York regulators were sent only to firms with close ties to New York to avoid any jurisdictional issues.

Battery Point Financial confirmed that it had received a subpoena. The firm, which is backed by the private equity firm Kohlberg Kravis Roberts & Company, is buying rundown homes in several states and renovating them before selling them to borrowers through 20-year contracts with monthly installment payments.

Apollo Residential, a publicly traded company, is providing financing to a firm in Louisiana that offers a variant of a contract for deed, called a bond for title.

New York Mortgage Trust recently purchased some homes with contracts for deeds in place from a Dallas investment firm, Harbour Portfolio Advisors, which has been selling off some of its large portfolio of homes and contracts.

The spokesman for Apollo Residential confirmed the subpoenas to both firms and said they “intend to cooperate fully.” Representatives for New York Mortgage Trust did not return a request for comment.

The subpoenas, which were reported earlier by Reuters, are seeking information from the firms about any deals they have to sell homes through contracts for deeds, bonds for titles, rent-to-own arrangements or other seller financing. The subpoenas seek copies of contracts, among other items.

Battery Point’s founder, Jeremy Healey, has sought to differentiate his firm from other big players in the market, saying that unlike them, Battery Point has structured its 20-year contracts to comply with new federal guidelines for high-interest mortgages.

Battery Point recently entered the contract-for-deed market, and has bought more than 300 homes in 16 states with the intention to resell the properties for around $72,000 apiece, according to an interview with Mr. Healey earlier this year. It does not own any properties in the state of New York, the company said on Friday.

“We look forward to addressing our residential installment contract with the department, as it is designed to solve a number of longstanding regulatory and consumer issues with the traditional contract for deed,” Mr. Healey said in a statement on Friday. “We support improving awareness of how nonmortgage financing products can create opportunities for consumers who are shut out of the mortgage market.”

A version of this article appears in print on , on Page B2 of the New York edition with the headline: Lenders Subpoenaed Over Seller-Financed Mortgage Alternatives. Order Reprints | Today’s Paper | Subscribe